Investing in a Future Palestinian State

Conference Features Paths to Economic Stability and a Two-State Solution

By Ian Bomberg and Moran Banai
Posted on June 7, 2010, 9:00 am

The Palestinian economy has begun to grow in recent years, buoyed by the Palestinian Authority or PA government’s actions to bolster state-building efforts, Israel’s decision to loosen some of its movement and access restrictions, and donor assistance. The meeting of business and government leaders at last week’s Palestine Investment Conference was a public symbol of the Palestinian and international commitment to this economic development.

As noted in recent World Bank and IMF reports, entrepreneurialism is critical to meeting the conference’s aim of developing a stable economic foundation for a future Palestinian state. All parties—Palestinians, Israelis, regional states, and the broader international community—will therefore need to continue to improve the conditions that allow for growth of private investment: governance, security, movement and access, and donor assistance. These improvements must be paired with progress on peace efforts; together they will lay the groundwork for a sustainable economy and ultimately a two-state solution.

Combined efforts by governments and the business community have improved the Palestinian economy during the past few years. Overall gross domestic product growth in 2009 was 6.8 percent in the West Bank and Gaza Strip—markedly greater than the 5.5 percent estimated in the PA’s 2009 budget. The majority of this improvement occurred in the West Bank, which saw 8.5 percent GDP growth. Gaza lagged behind with only 1 percent growth due to the ongoing blockade, which is tied to Hamas’s refusal to accept the Quartet requirements and the continued captivity of Israeli staff sergeant Gilad Shalit.

The PA has made important progress in reforming governmental institutions, a key component of the economic growth. The Palestinian government, under Prime Minister Salam Fayyad, released two documents in August 2009 and January 2010 outlining goals and accompanying projects for improving governance and laying the institutional foundations of a future Palestinian state. This work has already begun to produce results such as recent improvements in government budgeting, accounting, auditing, and overall transparency. The PA will release another report this summer that will outline the government’s priorities for the upcoming year.

Security sector development has been a key component of these efforts. Five battalions of Palestinian security forces, totaling more than 2,600 members, have already completed training. These Jordanian-trained forces, which receive support from Britain, Canada, and the United States, have been deployed in five major West Bank cities. They have been largely successful in their efforts to reestablish law and order in the towns where they are deployed.

These efforts in the security and governance sectors have created an environment where foreign parties—both public and private—feel more comfortable investing their money.

Easing movement and access restrictions is the second critical component in the economic growth. According to the U.N. Office for the Coordination of Human Affairs, 550 obstacles remained in the West Bank as of February 2010 compared to 630 a year earlier. The Israeli government has also improved conditions at West Bank crossings by extending operating hours and reopening some crossings to vehicular traffic in response to the improved security situation. These changes speed up the flow of goods and people throughout the West Bank and allow businesses to access international markets.

But more needs to be done. Recent World Bank and International Monetary Fund reports suggest that maintaining economic gains will require greater loosening movement restrictions and increasing Palestinian access to Area C, which comprises about 60 percent of the West Bank. Easing restrictions on access to Gaza is also critical because the West Bank and Gaza are highly dependent on each other. Neither will be able to maintain sustainable growth in the long run without trade between them.

Another component of the recent growth is donor assistance. The PA requested $1.45 billion in assistance for 2009, and donors met $1.35 billion of that request. Ongoing international aid will be critical to support the PA in its state-building efforts and all parties should live up to their commitments in supporting these efforts. Yet long-term economic growth will ultimately depend on sustained private sector investment, not aid. And this private sector investment is dependent on the very elements that currently account for economic growth.

Israelis, Palestinians, regional actors, and the international community must enhance their coordination and cooperation in order to encourage the private sector to invest in the Palestinian economy. One example is work on the security sector. Britain, Canada, Jordan, and the United States will need to continue their efforts to support the training of Palestinian security forces, which will enhance investor confidence. Israelis and Palestinians will need to increase coordination in equipping Palestinian forces. And regional and international actors will need to work closely with the PA on strengthening the Palestinian judicial sector and the local police, both critical components of the security sector. It will be difficult to ensure a stable security sector in the long run without working together on all of these different moving parts, and without such stability private sector investment and the Palestinian economy will decline.

Providing a horizon for a political endgame to the conflict is the critical piece for sustaining the bottom-up efforts. Improvements in people’s day-to-day lives and to the Palestinian economy that are not tied to a vision of a Palestinian state are unsustainable. The Palestinian people must buy into the idea that their lives are improving and that at the end of the road there will be an end to the occupation and the formation of a viable Palestinian state. And the ultimate guarantor of certainty and stability for investors and entrepreneurs is a political process leading to two secure states, coupled with Palestinian institution building.

Last week’s conference is an important tool for encouraging the kind of private investment that in combination with continued institution-building efforts and a political horizon has the potential to build sustained and sustainable growth for the Palestinian economy. Palestinians, Israelis, Arabs, Americans, and the whole international community all have an important role in ensuring success.

Ian Bomberg is a Research Assistant and Moran Banai is the Policy Director for Middle East Progress.